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G8 and tax transparency: Commitment or posturing?

July 3, 2013 : Uche Igwe (ucheigwe@gmail.com)

Uche Igwe

The commitment of the G8 countries last month to crack down on international tax evasion by supporting a global infrastructure for automatic exchange of tax information is a very commendable one. The international financial system has continued to erroneously label Africa sometimes as a begging continent without revealing the true picture that resources and revenues that will develop Africa lie within Africa. What the world simply needs do is to plug the holes of leakage while Africa leaders themselves decidedly purge themselves of self in the pursuit of the common interest of Africans. As many analysts have observed, the missing link in Africa’s development equation is the precise scale and impact of illicit financial flows through tax evasion, tax avoidance, unnecessary waivers and exemptions. Christian Aid, a UK based non-governmental organisation estimated that tax evasion through transfer mispricing and falsified invoicing cost the developing world $60bn annually in lost revenue as of 2008. This figure represents 150 per cent of the combined budget of all donations from all donor countries to the continent. In a country like Nigeria, multinationals paying little tax have become an acceptable way of doing business. Between 2005 and 2007, Nigeria lost about 502 million pounds ($762.9m) of tax revenue from capital flight according a Christian Aid report released in March 2009. The manipulation of tax rules is facilitated through a low tax and secrecy jurisdiction popularly known as tax havens. Even the name, tax haven, has become contentious in recent times as some analysts now prefer to call it secrecy jurisdiction or offshore financial centre. Regardless of what you choose to call them, all tax havens have something in common: They offer zero tax rates and provide facilities for people and entities to get around the rules, laws and regulations of other countries using secrecy as a prime tool. Some of them include territories such as the Channel Islands, Cayman Island and Virgin Island – all under British control. Others include Delaware, Nevada, and Wyoming in the United States of America.

This is where the support of the G8 countries is very strategic in order to tackle this unjust haemorrhage of revenue especially from resource rich developing countries. One way that multinationals perpetrate tax fraud is through transfer pricing inbetween branches, entities or subsidiaries of the same company. While this remains a legitimate financial practice, many companies especially in the oil and gas sector have abused it to the detriment of their host countries through a discretionary allocation of costs and overheads that transfers a huge chunk of their taxable profits through a subsidiary registered in a low tax jurisdiction. Such a discretion allows them to minimise tax liabilities to host countries and swell their profits.

Calculations from Tax Justice Network indicate that many developing countries collect about 40 per cent of their tax potential. While all these losses may not be due to transfer mispricing alone, one can safely argue that they form its largest component. Pending on the passage and operationalisation of the Petroleum Industry Bill, the Nigerian National Petroleum Corporation still operates a Joint Venture Agreements system which is believed to offer robust incentives for discretion, manipulation and inclusion of sundry costs that can never by substantiated, in collusion with multinationals. Sad indeed! It is said that illegal trade and transfer pricing will be responsible for the death of 5.6 million young children in developing countries between 2000 and 2015. At 1,000 deaths per day and with more than half already dead, will the G8 commitment contribute any meaningfully in keeping the remaining fraction alive? Assuming the best of intentions from the G8 countries, what do developing countries need to do to key in? Many of the illegalities in the extractive industry are hidden in technical jargon. For instance, transfer pricing manipulation is only possible through a web of complexities involving numerous layer actors — accountants, lawyers and consultants who calculate and often miscalculate the prices that are acceptable for transactions and devise ways of complying or subverting the rules of the game. And so, the first thing is that our tax agencies in developing countries like the Federal Inland Revenue Services in the case of Nigeria, must develop a cutting edge capacity on these issues if they have not done so already. The Arm’s Length Principle has been used by many developing countries’ tax authorities to compare transactions within entities with those between unrelated entities i.e. intergroup and intragroup transactions.

Another method is the Global Apportionment Method that allocates profits to entities based on a multi-factor weighed formula. The third method is through Country by Country Reporting that mandates multinational corporations to disclose full details of commercial transactions by jurisdiction instead of along product or commercial lines. When all this is put in place, tax authorities in developing countries would need to rid their staff of corrupt practices through bribery, extortion and collusion. Often, the perpetrators of transfer mispricing or any other form of tax evasion or avoidance will require a collusion of an unpatriotic tax official who may wish to accept a personal incentive to undermine the maximisation of and collection of full government take. The Halliburton Energy company bribery scandal that involved the illicit exchange of about $180m to influence the operations of the gas sector in Nigeria is a case in point.

If tax transparency is implemented on the continent, then there is a huge potential that things will turn around for good. Already, there are spots of improvements and huge potential in Africa that the world cannot continue to overlook and the G8 countries know it too. This marked progress was reflected by the Mckenzie Report on Africa 2010 as well as in Steve Radelet’s authoritative book, Emerging Africa, in the same year. This brings forward an optimistic picture with substantial positives that can offer positive partnership for the world to leverage on as a partner. For instance, the Democratic Republic of Congo has half of the world’s cobalt and a quarter of the world’s diamond reserves. Sierra Leone has a quarter of the world’s diamond reserves. Furthermore, the African continent has between 80 and 90 per cent of the world’s reserves of chromium and platinum and 40 per cent of the world reserves for gold. Africa’s oil and gas has become important components of the world’s hydrocarbon demand-supply balance. By 2015, 13 per cent of global oil production will take place in Africa with at least 19 countries as significant producers. As of 2012, Nigeria had an estimated 37.2 billion barrels of proven oil reserves, 2.4 per cent of the world’s total.

With good resource husbandry, a leadership committed to universalism and a sincere international partnership, Africa will be able to finance its own development. Prosperity in Africa is good for the world. A global framework must be set to translate the exemplary commitment of G8 countries into concrete action beyond benevolent posturing. Most importantly, multinational companies particularly those operating in the extractive industry must be made to report where they make their profits and pay taxes across the world. That framework must include a mechanism to punish those who are found culpable especially by forcing them to make reparation. The world must make it harder to evade or avoid tax anywhere and everywhere. It is in everyone’s interest, and I mean everyone, for the developing countries to strengthen their domestic revenue base transparently, improve funding and ownership of their own development and create sustainable states. The world demands action on these commitments as we are willing to accept nothing less.

great article on tax.The g8 is doing it for their own self need for more resources.Many of those tax haven are in their territory.Are they willing to give up the associated benefit if the benefit is not to their govt but to a developing nations?

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